Financial Statements and Analysis Test - 6

Following parties are interested in the Financial statement analysis:

Creditors(to know if they will get their payment)

Government( to levy taxes)

Investors(to know how return on their investment)

 Companies Act 2013 is in force these days. Earlier Companies Act 1956 was in force.

Prepaid expenses are those expenses which paid in advance by the firm. These expenses are shown under other current assets.

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company's brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill.

Classification of items:

Preliminary Expense --- Fictitious Asset

The expenses incurred when a company is formed and before the start of any business operations are termed as preliminary expenses, they are a good example of fictitious assets which are written off every year from the profits earned by the business.

Preliminary expenses include Legal cost, Professional fees, Stamp duty, Printing fees, etc.

Preliminary expenses are shown on the Assets side of the balance sheet.

Sales appear in the Statement of Profit and Loss and the following items are shown in the balance sheet:

•Creditors

•Goodwill

•Trade Payables

Loose Tools are shown under the heading of Inventories. Loose Tools are current assets of the company.

Loose Tools are Current Assets, with high turnover. Unlike other Assets these tools go useless very fast, besides they are used in production of something else with direct process.Example: Screw drivers

Stores and spares comes in balance sheet under the heading Inventories. Following items do not take place in Balance Sheet:

•Sales

•Purchase

•Expenses

Sales ,Purchases and Expenses are a art of Statement of Profit and Loss,not Balance Sheet.

Balance Sheet of a company is prepared as per the Schedule III of the Indian Companies Act, 2013.

Securities premium reserve is shown under the heading Shareholders funds and sub heading Reserves and Surplus.

Titles and Mastheads are shown under the heading of Intangible assets.It does not have physical existence and gives benefit for more than one accounting period.

Claim against the company not acknowledged as debt is shown as contingent liability after preparing the balance sheet. It is shown as a footnote to the balance sheet. Contingent liabilities are those which may or may not arise as they are dependent on happening in future.

Computer software is an intangible asset. It shown under the heading of Fixed Assets and sub heading Intangible Assets.It does not have physical existence and gives benefit for more than one accounting period.

Work in progress is shown under the heading of current assets and sub heading Inventories.Work in progress is semi finished stock of goods held for purpose of trade in mormal course of business.So they are shown under inventories under current assets. But capital work in progress is shown under the fixed assets.

Analysis made by external users on the basis of published financial statements is called external analysis. Only an external user may have to use published statements; an internal user has access to all accounting records, he would not have to depend on and wait for the information to be published and they can do internal analysis throughout the year.

All assets are shown in the order of permanence i.e. Fixed Assets will come first,then investments , then current assets and liquid assets.

Office building under construction is shown under fixed assets i.e. Capital work in progress.This account is shown separately in the balance sheet below the fixed asset. Capital work in progress account contains all expenses incurred on the asset until it is converted into working condition. All these expenses will become part of the cost of that asset.

Bills of exchange is not shown under the heading Reserves and surplus but following items will be shown under this heading:

•Securities Premium Reserve

•Statement of profit and loss

•Capital Reserve

Bills of Exchange come as trade payables in current liabilities.

A company can obtain special permission form registrar to extend the accounting period which can be up to 18 months.The Registrar has power to extend a financial year up to eighteen months in terms of the proviso under section 210(4) of the Companies Act.In order that the public record of a company’s accounts is regularly updated, an accounting period cannot be extended to longer than 18 months, and in most cases, the accounting period cannot be extended more than once every 5 years.

Information available from the analysis of financial statement will serve the following:

•Potential Investors (to make decisions regarding investment)

•Economist and Researchers(to make policies)

•Stock Exchange(to know about company's worth and market standing)